HARYANA URBAN DEVELOPMENT AUTHORITY,PANCHKULA, HARYANA vs. PRINCIPAL COMMISSIONER OF INCOME TAX, PANCHKULA , HARYANA

ITA 668/CHANDI/2025Status: DisposedITAT Chandigarh29 December 2025AY 2021-2210 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal found substantial force in the arguments of the Revenue. The AO accepted the claim of interest on VAT without examining the underlying provisions of the Haryana VAT Act. The levy of interest at 3% per month after the initial three months clearly suggests penal interest rather than compensatory interest. While the Supreme Court in Mahalakshmi Sugar Mills held that interest paid to compensate revenue for delay is allowable, it is a settled principle that if a levy is composite (partly compensatory and partly penal), the penal component is not permissible. The Tribunal opined that where the quantum of impost substantially exceeds commercial rates or escalates to punish the defaulter, it partakes the character of a penalty. By failing to verify the break-up of the interest payment and segregate the penal portion, the AO committed an error. The PCIT was justified in holding that the order was erroneous and prejudicial to the interest of the revenue. The AO is directed to examine the matter afresh. The Tribunal clarified that its discussion was confined to the issue of whether the AO's order was erroneous and prejudicial to the revenue under section 263, and the AO should decide the issue afresh without being influenced by the observations made.

What were the facts?

The assessee, Haryana Urban Development Authority, filed an appeal against an order passed by the Principal Commissioner of Income Tax (PCIT), Panchkula, under section 263 of the Income Tax Act, 1961, for Assessment Year 2021-22. The PCIT had held the assessment order dated 26.12.2022, passed by the Assessing Officer (AO), to be erroneous and prejudicial to the interest of revenue. The dispute arose from the assessee's claim of deduction of Rs.4,23,71,541/- towards Sales Tax/VAT liability, which included interest on delayed payment. The PCIT invoked section 263 on the grounds that the AO failed to verify if the interest component was capital or penal in nature.

What were the issues?

1. Whether the order passed by the PCIT under section 263 of the Income Tax Act, 1961, holding the assessment order dated 26.12.2022 as erroneous and prejudicial to the interest of revenue, is justified? 2. Whether the PCIT erred in invoking powers under section 263 and directing the AO to pass a fresh assessment order? Assessee's contentions: The interest paid on VAT is compensatory and allowable as business expenditure under section 37(1) and section 43B. The assessee relies on the Supreme Court decision in Mahalakshmi Sugar Mills Co. v. CIT. The assessee follows a cash basis of accounting and paid the VAT liability during the year, making the deduction allowable under section 43B in the year of payment. The assessee also relies on ITAT orders in its own case for earlier years where similar additions were deleted. The AO's view was a plausible one, supported by ITAT orders, hence section 263 proceedings are not sustainable. The PCIT is trying to substitute his views for the AO's. Revenue's contentions: The AO failed to verify the nature of payments, specifically whether they were capital or penal. The initial interest rate might be compensatory, but the escalation to 3% per month is penal and disallowed under the Explanation to Section 37(1). The higher rate of interest is a statutory penalty, not simple interest. The AO failed to examine this bifurcation, rendering the order erroneous.

Which sections of the Income-tax Act were involved?

Section 263,Section 37(1),Section 43B,Section 2(28A)

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Cause title — parties, addresses and appearances
आयकर अपीलीयअधिकरण, चण्डीगढ़ न्यायपीठ “ए”, चण्डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “A”, CHANDIGARH HEARING THROUGH: PHYSICAL MODE श्री ललित कुमार, न्यायिक सदस्य एवं श्री कृणवन्त सहाय, लेखा सदस्य BEFORE: SHRI. LALIET KUMAR, JM &SHRI. KRINWANT SAHAY, AM आयकर अपील सं . / ITA No.668/Chd/2025 निर्धारण वर्ष / Assessment Year : 2021-22 Haryana Urban Development Authority C-3, Huda Complex, Sector-6, Panchkula-134109, Haryana बनाम The Pr. CIT Panchkula स्थायी लेखासं. / PAN NO: AAAAH0087M अपीलार्थी/Appellant प्रत्यर्थी/Respondent निर्धारिती की ओर से/Assessee by : राजस्वकी ओर से / Revenue by : Ms. Rattan Kaur & Shri A.K. Jindal, C.A's Shri Manav Bansal, CIT, DR सुनवाई की तारीख/Date of Hearing : 17/12/2025 उदघोषणा की तारीख / Date of Pronouncement : 29/12/2025

आदेश/Order PER LALIET KUMAR, J.M: This appeal filed by the Assessee is directed against the order of the Principal Commissioner of Income Tax (PCIT), Panchkula, dated 31/03/2025, passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the Assessment Year (AY) 2021-22. 2. In the present appeal Assessee has raised the following grounds:

1.

That the PCIT has erred in law & facts

The order continues below.

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